On February 3, 2010, an important ruling was rendered affecting the employee-employer relationship with respect to patents in which the employees are inventors (hereinafter: the "Ruling"). The Ruling refers to patents that are considered “Service Inventions”, which is defined in Section 132 of the Israeli Patent Law - 1967 (hereinafter: the "Law"). The Ruling was rendered by the Committee on Compensation and Royalties established by Section 109 of the Law (hereinafter: the "Committee").

In accordance with Section 132 of the Law, “an invention by an employee, arrived at in consequence of his service and during the period of his service” (hereinafter: a "Service Invention") is proprietary to the employer, unless the parties have agreed otherwise. Section 134 of the Law establishes the right of the employee to remuneration for such Service Invention, whereas according to the Law, and absent an agreement between the employee and employer regarding the employee's entitlement to remuneration, its extent and terms will be determined by the Committee. In its decision, the Committee is expected to take under consideration certain criteria, as set out by the Law.

Recently, the Committee heard a case in which an employee requested the Committee to determine his entitlement to remuneration for a Service Invention. The employer filed for removal, citing two main arguments: 1. that there was an agreement between the parties, pursuant to which the employee waived his rights to the Service Invention, therefore Section 134 should not apply; 2. the employee's request was premature, as no use had yet been made of the Service Invention.

The Committee deliberated on the issue whether an employee may waive his right to remuneration for a Service Invention, or was such right an inherent right that can not be waived, as it is part of the protective labor laws. In other words, the issue was does Section 134 apply only in the event that there is no agreement between the employee and employer with respect to a Service Invention, or does it also apply in the event that there is an agreement which denounces the employee's right to  for such Service Invention. The Committee reached its conclusion based on examining the content of the agreement between the parties, and chose not to render a principle decision in this matter.

The Committee established that an employee's waiver of his right to royalties must be explicitly agreed on. Furthermore, the Committee established that since the employment agreement in the case before it did not specifically refer to Service Inventions, it could not be construed as a waiver of the employee's right to royalties. The Committee also rejected the second argument raised by the employer and determined that in order to establish the right to remuneration, there is no need for actual exploitation of the Service Invention, and the potential for exploitation is sufficient.

Up until now, many employers were under the presumption that the standard language of Intellectual Property clauses appearing in many employment agreements is enough to protect the rights of the employers, but the Ruling adversely affects this perception. It stems from the Ruling that if an employer wishes to avoid payment of royalties to an employee who took part in a Service Invention, then such desire must be explicitly written in an agreement.

In this context, the Committee's ruling raises complex questions, such as should an employer include in the employment agreement specific waivers, thus informing the employee of the existence of the right to royalties (which many usually are unaware of), and what are the most effective timing and framework to establish such waiver. For the employer, this issue might become an additional item on the list of topics on which the parties will need to negotiate. Another issue to consider is whether it is favorable to establish agreed royalties or that the royalties are part of the employee’s salary instead of a complete waiver by the employee, which may become null and void in the future.

The Committee's ruling is of great significance and requires reevaluation of existing and future employment agreements. Every employer should consult and consider what will be the most suitable solution to his needs in accordance with the unique features of his business and his employees.

Moreover, it is advisable to seek advice in any IP transaction involving rights originated in service inventions subject to the Law.

We are at your service should you have any questions or desire any clarifications:

Miriam Hackmey, Intellectual Property Department - miriamh@gscb-law.co.il

Kobie Refaeli, Labor Law Department - krefaeli@gscb-law.co.il

GSCB - Glusman Shem-Tov Chowers Broid & Co. – Law Offices